Armstrong, Brian (1983- )

A steep sell-off that gained momentum this week starkly illustrated the risks of the experimental and unregulated digital currencies.SAN FRANCISCO — The price of Bitcoin plunged to its lowest point since 2020. Coinbase, the large cryptocurrency exchange, tanked in value. A cryptocurrency that promoted itself as a stable means of exchange collapsed. And more than $300 billion was wiped out by a crash in cryptocurrency prices since Monday.The crypto world went into a full meltdown this week in a sell-off that graphically illustrated the risks of the experimental and unregulated digital currencies. Even as celebrities such as Kim Kardashian and tech moguls like Elon Musk have talked up crypto, the accelerating declines of virtual currencies like Bitcoin and Ether show that, in some cases, two years of financial gains can disappear overnight.The moment of panic amounted to the worst reset in cryptocurrencies since Bitcoin plummeted 80 percent in 2018. But this time, the falling prices have broader impact because more people and institutions hold the currencies. Critics said the collapse was long overdue, while some traders compared the alarm and fear to the start of the 2008 financial crisis.“This is like the perfect storm,” said Dan Dolev, an analyst who covers crypto companies and financial technology at the Mizuho Group.During the coronavirus pandemic, people have flooded into virtual currencies, with 16 percent of Americans now owning some, up from 1 percent in 2015, according to a Pew Research Center survey. Big banks like Northern Trust and Bank of America also streamed in, along with hedge funds, some using debt to further juice their crypto bets.Early investors are still probably in a comfortable position. But the rapid declines this week have been especially acute for investors who bought cryptocurrencies when prices surged last year.The fall in cryptocurrencies is part of a broader pullback from risky assets, spurred by rising interest rates, inflation and economic uncertainty caused by Russia’s invasion of Ukraine. Those factors have compounded a so-called pandemic hangover that began as life started returning to normal in the United States, hurting the stock prices of companies like Zoom and Netflix that thrived during lockdowns.But crypto’s decline is more severe than the broader plunge in the stock market. While the S&P 500 is down 18 percent so far this year, Bitcoin’s price has dropped 40 percent in the same period. In the last five days alone, Bitcoin has tumbled 20 percent, compared to a 5 percent decline in the S&P 500.Crypto Experiences a Broad Collapse1-year change in the value of cryptocurrencies

Prices are through 6 p.m. Eastern time on May 12.Source: CoinMarketCapBy The New York TimesHow long crypto’s collapse might last is unclear. Cryptocurrency prices have typically rebounded from major losses, though in some cases it took several years to reach new heights.“It’s hard to say, ‘Is this Lehman Brothers?’” said Charles Cascarilla, a founder of the blockchain company Paxos, referring to the financial services firm that went bankrupt at the start of the 2008 financial crisis. “We’re going to need some more time to figure it out. You can’t respond at this type of speed.”The origins of cryptocurrencies trace back to 2008, when a shadowy figure calling himself Satoshi Nakamoto created Bitcoin. The virtual currency was portrayed as a decentralized alternative to the traditional financial system. Rather than relying on gatekeepers like banks to facilitate commerce, Bitcoin proponents preferred to conduct transactions among themselves, recording each one on a shared ledger called a blockchain.Prominent tech leaders including Mr. Musk, Jack Dorsey, a founder of Twitter, and Marc Andreessen, an investor, embraced the technology as it grew from a novel curiosity into a cultlike movement. The value of cryptocurrencies exploded, minting a new class of crypto billionaires. Other forms of cryptocurrency, including Ether and Dogecoin, captured the public’s attention, particularly in the pandemic, when excess cash in the financial system led people to day trade for entertainment.Cryptocurrency prices reached a peak late last year and have since slid as fears over the economy grew. But the meltdown gathered momentum this week when TerraUSD, a stablecoin, imploded. Stablecoins, which are meant to be a more reliable means of exchange, are typically pegged to a stable asset such as the U.S. dollar and are intended not to fluctuate in value. Many traders use them to buy other cryptocurrencies.TerraUSD had the backing of credible venture capital firms, including Arrington Capital and Lightspeed Venture Partners, which invested tens of millions of dollars to fund crypto projects built on the currency. That gave “a false sense of security to people who might not otherwise know about these things,” said Kathleen Breitman, one of the founders of Tezos, a crypto platform.But TerraUSD was not backed by cash, treasuries or other traditional assets. Instead, it derived its supposed stability from algorithms that linked its value to a sister cryptocurrency called Luna.This week, Luna lost almost its entire value. That immediately had a knock-on effect on TerraUSD, which fell to a low of 23 cents on Wednesday. As investors panicked, Tether, the most popular stablecoin and a linchpin of crypto trading, also wavered from its own $1 peg. Tether fell as low as $0.95 before recovering. (Tether is backed by cash and other traditional assets.)The volatility quickly drew attention in Washington, where stablecoins have been on regulators’ radar. Last fall, the Treasury Department issued a report calling on Congress to devise rules for the stablecoin ecosystem.“We really need a regulatory framework,” Treasury Secretary Janet Yellen said at a congressional hearing on Thursday. “In the last couple of days, we’ve had a real-life demonstration of the risks.”Stablecoins “present the same kinds of risks that we have known for centuries in connection with bank runs,” she added.Workers installing a cryptocurrency mining data center in Medley, Fla.Rose Marie Cromwell for The New York TimesOther parts of the crypto ecosystem soured at the same time. On Tuesday, Coinbase, one of the largest cryptocurrency exchanges, reported a $430 million quarterly loss and said it had lost more than two million active users. The company’s stock price has plunged 82 percent since its triumphant market debut in April 2021.A Guide to CryptocurrencyCard 1 of 9A glossary. More